Treasury Dept. Conference Highlights Need for Corporate Tax Reform

Published November 1, 2007

The U.S. Treasury Department held a conference July 26 regarding the growing uncompetitiveness of the U.S. corporate tax system.

Scholars and heads of large corporations have been pointing out the serious problems with the U.S. corporate tax for more than 15 years. There is now a growing consensus that the complex and high-rate corporate tax needs to be overhauled.

U.S. Rates Not Competitive

Among the themes discussed at the conference:

  • Europe is on a corporate tax-cutting binge. The U.S. federal plus average state corporate tax rate stands at 40 percent, which is much higher than the European Union average of 24 percent. It appears foreign rates will keep falling, putting an ever-greater squeeze on U.S. competitiveness.
  • Intel Corporation stressed tax costs are an important consideration when the firm locates new semiconductor plants. Over a 10-year time frame, Intel estimates it costs $1 billion more to build and run a plant in the United States than in competing countries such as Ireland and Malaysia. About 70 percent of the U.S. cost disadvantage stems from taxes.
  • General Electric officials said tax rates are not the key issue in determining where it builds new plants. In GE’s case, tax rules on foreign income determine whether, say, a U.S. or German company ends up owning a new facility in other countries such as Brazil. From a tax perspective, the United States is a bad place to locate the headquarters of a multinational corporation.
  • There is a trend toward “territorial” corporate tax systems, with about two-thirds of countries having such systems today. A U.S.-style “worldwide” system is less and less popular because it puts home-country corporations at a disadvantage in global markets.

Capital Is Mobile

Several speakers stressed that an increasing share of corporate value is in the form of intangible property such as patents. Intangible property is more mobile than tangible property, and thus easier to relocate to low-tax jurisdictions.

  • Peter Merrill of PricewaterhouseCoopers noted higher capital mobility is causing a greater share of the U.S. corporate tax burden to fall on U.S. workers. Kevin Hassett of the American Enterprise Institute has shown statistically that higher corporate tax rates mean lower worker wages.
  • Supply-side economists have long pushed for tax breaks on new capital investments. But there was widespread agreement at the Treasury roundtable that getting the overall corporate tax rate down is more important than incentives such as investment tax credits. A lower corporate rate reduces all the distortions in the corporate tax code and directly responds to the challenges of growing global capital mobility.

Chris Edwards ([email protected]) is director of tax policy studies at the Cato Institute.